QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ___________________

Commission File Number 000-27905

MutualFirst Financial, Inc.

(Exact name of registrant as specified in its charter)

Maryland

35-2085640

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

110 E. Charles Street, Muncie, Indiana

47305-2419

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including
area code: (765) 747-2800

Securities registered pursuant to Section 12(b)
of the Act:

Title of each class

Name of each exchange on which registered

Common Stock, par value $.01 per share

Nasdaq Global Market

Securities Registered Pursuant to Section 12(g)
of the Act:

None

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions
of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Act.

Large accelerated filer

¨

Accelerated filer

x

Non-accelerated filer

¨

Smaller reporting company

¨

Emerging growth company

¨

If an emerging
growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the registrant’s
classes of common stock as of the latest practicable date. As of May 8, 2017, there were 7,344,233 shares of the registrant’s
common stock outstanding.

Loans, net of allowance for loan losses of $12,382 at both March 31,
2017 and December 31, 2016

1,154,943

1,157,120

Premises and equipment, net

21,041

21,200

Federal Home Loan Bank stock

11,183

10,925

Deferred tax asset, net

11,769

12,037

Cash value of life insurance

51,866

51,594

Goodwill

1,800

1,800

Other real estate owned and repossessed assets

1,035

1,199

Other assets

13,532

15,429

Total assets

$

1,551,421

$

1,553,133

Liabilities and Stockholders' Equity

Liabilities

Deposits

Noninterest-bearing

$

188,131

$

178,046

Interest-bearing

982,792

975,336

Total deposits

1,170,923

1,153,382

Federal Home Loan Bank advances

218,191

240,591

Other borrowings

4,490

4,189

Other liabilities

15,219

14,933

Total liabilities

1,408,823

1,413,095

Commitments and Contingencies

Stockholders' Equity

Common stock, $.01 par value

Authorized - 20,000,000 shares

Issued and outstanding - 7,344,233 and 7,324,233 shares at March 31, 2017 and December 31, 2016, respectively

73

73

Additional paid-in capital

74,303

74,164

Retained earnings

69,085

67,055

Accumulated other comprehensive loss

(863

)

(1,254

)

Total stockholders' equity

142,598

140,038

Total liabilities and stockholders' equity

$

1,551,421

$

1,553,133

See notes to consolidated condensed financial statements

1

MutualFirst
Financial, Inc.

Consolidated
Condensed Statements of Income(Unaudited)

(In Thousands,
Except Share and Per Share Data)

Three Months Ended March 31,

2017

2016

Interest and Dividend Income

Loans receivable

$

12,249

$

11,220

Investment securities

1,720

1,689

Federal Home Loan Bank stock

115

105

Deposits with financial institutions

25

20

Total interest and dividend income

14,109

13,034

Interest Expense

Deposits

1,465

1,285

Federal Home Loan Bank advances

886

895

Other

45

92

Total interest expense

2,396

2,272

Net Interest Income

11,713

10,762

Provision for loan losses

200

200

Net Interest Income After Provision for Loan Losses

11,513

10,562

Non-interest Income

Service fee income

1,400

1,374

Net realized gain on sales of available for sale securities

129

118

Commissions

1,196

1,100

Net gains on sales of loans

770

940

Net servicing fees

101

70

Increase in cash value of life insurance

272

284

Gain (loss) on sale of other real estate and repossessed assets

54

(29

)

Other income

202

140

Total non-interest income

4,124

3,997

Non-interest Expenses

Salaries and employee benefits

6,726

6,491

Net occupancy expenses

809

646

Equipment expenses

427

487

Data processing fees

554

489

ATM and debit card expenses

418

380

Deposit insurance

213

234

Professional fees

396

470

Advertising and promotion

312

427

Software subscriptions and maintenance

569

480

Other real estate and repossessed assets

47

72

Other expenses

935

1,240

Total non-interest expenses

11,406

11,416

Income Before Income Tax

4,231

3,143

Income tax expense

1,025

778

Net Income Available to Common Shareholders

$

3,206

$

2,365

Earnings Per Common Share

Basic

$

0.44

$

0.32

Diluted

$

0.43

$

0.31

Dividends Per Common Share

$

0.16

$

0.14

See notes to consolidated condensed financial statements

2

MutualFirst
Financial, Inc.

Consolidated
Condensed Statements of Comprehensive Income(Unaudited)

(In Thousands)

Three Months Ended March 31,

2017

2016

Net Income

$

3,206

$

2,365

Other Comprehensive Income

Net unrealized holding gain on securities available for sale

715

3,414

Reclassification adjustment for realized gains included in net income

(129

)

(118

)

Net unrealized gain on derivative used for cash flow hedges

-

(25

)

586

3,271

Income tax expense related to other comprehensive income

(195

)

(1,119

)

Other comprehensive income, net of tax

391

2,152

Comprehensive Income

$

3,597

$

4,517

See notes to consolidated condensed financial statements

3

MutualFirst
Financial, Inc.

Consolidated
Condensed Statement of Changes in Stockholders’ Equity
For the Period Ended March 31, 2017

(Unaudited)

(In Thousands,
Except Share and Per Share Data)

Common Stock

Additional Paid-in Capital

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

Total

Balances December 31, 2016

$

73

$

74,164

$

67,055

$

(1,254

)

$

140,038

Net income

3,206

3,206

Other comprehensive income, net of taxes

391

391

Stock options, exercised

139

139

Cash dividends, common stock ($.16 per share)

(1,176

)

(1,176

)

Balances March 31, 2017

$

73

$

74,303

$

69,085

$

(863

)

$

142,598

See notes to consolidated condensed financial statements

4

MutualFirst
Financial, Inc.

Consolidated
Condensed Statements of Cash Flows(Unaudited)

(In Thousands,
Except Share and Per Share Data)

Three Months Ended March 31,

2017

2016

Operating Activities

Net income

$

3,206

$

2,365

Items not requiring cash

Provision for loan losses

200

200

Depreciation and amortization

1,125

1,220

Deferred income tax

73

640

Increase in cash value of life insurance

(272

)

(284

)

Loans originated for sale

(22,548

)

(23,853

)

Proceeds from sales of loans held for sale

22,243

24,826

Net gain on sale of loans

(770

)

(940

)

Net gain on sale of securities, available for sale

(129

)

(118

)

(Gain) loss on sale of other real estate and repossessed assets

(54

)

29

Change in

Interest receivable and other assets

1,441

(64

)

Interest payable and other liabilities

(775

)

1,762

Other adjustments

(58

)

34

Net cash provided by operating activities

3,682

5,817

Investing Activities

Net change in interest-bearing time deposits

(912

)

(980

)

Purchases of securities, available for sale

(15,934

)

(13,577

)

Proceeds from maturities and paydowns of securities, available for sale

6,730

7,788

Proceeds from sales of securities, available for sale

5,681

3,883

Purchase of Federal Home Loan Bank stock

(258

)

-

Net change in loans

1,257

(6,948

)

Purchases of premises and equipment

(201

)

(1,188

)

Proceeds from real estate owned sales

503

502

Proceeds from sale of real estate held for investment

502

-

Proceeds from sale of premises and equipment

-

65

Net cash used in investing activities

(2,632

)

(10,455

)

Financing Activities

Net change in

Noninterest-bearing, interest-bearing demand and savings deposits

16,525

17,868

Certificates of deposit

1,016

4,673

Proceeds from FHLB advances

77,500

64,200

Repayments of FHLB advances

(99,900

)

(71,200

)

Net proceeds (repayments) other borrowings

290

(190

)

Cash dividends

(1,176

)

(1,042

)

Stock options exercised

139

887

Stock repurchased

-

(761

)

Net cash provided by (used in) financing activities

(5,606

)

14,435

Net Change in Cash and Cash Equivalents

(4,556

)

9,797

Cash and Cash Equivalents, Beginning of Period

26,860

20,915

Cash and Cash Equivalents, End of Period

$

22,304

$

30,712

Additional Cash Flows Information

Interest paid

$

2,292

$

2,233

Transfers from loans to foreclosed assets

273

303

Mortgage servicing rights capitalized

61

72

Purchase of securities, due to broker

1,052

-

See
notes to consolidated condensed financial statements

5

MutualFirst
Financial, Inc.

Notes to Consolidated
Financial Statements

(Unaudited)

(In Thousands,
Except Share and Per Share Data)

Note 1:Basis of Presentation

The consolidated condensed financial statements include the accounts
ofMutualFirst Financial, Inc. (MutualFirst or the “Company”), its wholly owned subsidiaries, MFBC Statutory
Trust, MutualFirst Risk Management, Inc., Mutual Risk Advisors, Inc., and MutualBank, an Indiana commercial bank (“Mutual”
or the “Bank”), Mutual’s wholly owned subsidiaries, First MFSB Corporation, Mishawaka Financial Services, Summit
Service Corp. and the wholly owned subsidiary of Summit Service Corp., Summit Mortgage Inc. (“Summit”), Mutual Federal
Investment Company (“MFIC”), and MFIC majority owned subsidiary, Mutual Federal REIT, Inc. All significant inter-company
accounts and transactions have been eliminated in consolidation. These companies conform to accounting principles generally accepted
in the United States of America and reporting practices followed by the banking industry. The more significant of the policies
are described below.

Certain information and note disclosures normally included in the
Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed
or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the
Securities and Exchange Commission on March 16, 2017.

The interim consolidated condensed financial statements at and for
the three months ended March 31, 2017 and 2016, have not been audited by independent accountants, but in the opinion of management,
reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results
of operations and cash flows for such periods. The results of operations for the period are not necessarily indicative of the results
to be expected for the full year.

The Consolidated Condensed Balance Sheet of the Company as of December
31, 2016 has been derived from the Audited Consolidated Balance Sheet of the Company as of that date.

Note 2:Earnings Per Share

Earnings
per share were computed as follows:

Three Months Ended March 31,

2017

2016

Net Income

Weighted- Average Shares

Per-Share Amount

Net Income

Weighted- Average Shares

Per-Share Amount

Basic Earnings Per Share

Net income

$

3,206

7,332,455

$

0.44

$

2,365

7,466,409

$

0.32

Effect of Dilutive Securities

Stock options

-

148,026

-

149,471

Diluted Earnings Per Share

Net income available and assumed conversions

$

3,206

7,480,481

$

0.43

$

2,365

7,615,880

$

0.31

As of March 31, 2017 and 2016, the exercise price for all options
was lower than the average market price of the common shares.

Note 3: Impact of Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization
on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a
premium and requires the premium to be amortized to the earliest call date. However, the amendments do not require an accounting
change for securities held at a discount; the discount continues to be amortized to maturity. The amendments are effective for
annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoptions is permitted.
The Company early adopted this ASU in the first quarter of 2017 and it did not have a material impact on the financial statements.

6

In March 2016, the FASB issued ASU 2016-09, Compensation–Stock
Compensation: Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for
employee share-based payments and affect all organizations that issue share-based payment awards to their employees. This Update
includes amendments that currently apply, or may apply in the future, to the Company related to the following: (1) accounting for
the difference between the deduction for tax purposes and the amount of compensation cost recognized for financial reporting purposes;
(2) classification of excess tax benefits on the statement of cash flows; (3) accounting for forfeitures; (4) accounting for awards
partially settled in cash in excess of the employer’s minimum statutory tax withholding requirements; and (5)classification
of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The amendments
in this Update were effective for the Company for annual and interim periods beginning in the first quarter 2017. The ASU provides
separate transition provisions for each of the amendments. Initial adoption of this ASU in 2017 did not have a material impact
on the Company.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments. The ASU is intended to address diversity in how certain
cash receipts and cash payments are presented and classified in the statement of cash flows by specifically addressing eight specific
areas. The amendments are effective for the Company for annual and interim periods beginning in the first quarter of 2018. Early
adoption is permitted, including adoption in an interim period. The Company is currently evaluating the effects that this ASU will
have on its financial statements, specifically the Statement of Cash Flows, and does not expect these effects to be material.

In June 2016, the Financial Accounting Standards Board (FASB) issued
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements. Topic 326 amends
guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. The ASU is
intended to provide financial statement users with useful information about the expected credit losses on financial instruments
and other commitments to extend credit.

·

The ASU requires that a financial assets measured at amortized cost
(primarily for the Company, loans) to be presented at the amount net of a valuation allowance for credit losses, and that the income
statement include the measurement of credit losses for newly recognized financial assets as well as changes in expected losses
on previously recognized financial assets. The provisions of this ASU does not specify the method for measuring expected credit
losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. The new
model will be based on relevant information including past events, historical experience, current conditions, and reasonable and
supportive forecasts that affect the collectability of the asset. The provisions of this ASU differ from current U.S. GAAP in that
current U.S. GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.

·

This ASU requires that credit losses on available-for-sale debt securities
be presented as an allowance rather than as a write-down.

This ASU will be effective for the Company for interim and annual
periods beginning in the first quarter of 2020. Earlier adoption is permitted beginning in the first quarter of 2019. The Company
is in the evaluation stage for this ASU in order to determine the most appropriate method of implementation and all resources and
data (both current and historical) needed.

In February 2016, the FASB issued ASU 2016-02, Leases. The objective
of the amendment is to establish the principles that lessees and lessors shall apply to report useful information to users of financial
statements about the amount, timing, and uncertainty of cash flows arising from a lease. These changes will increase transparency
among companies by recognizing lease assets and liabilities on the balance sheet and disclosing additional information about lease
arrangements. The amendments in this update are effective for annual and interim periods beginning in the first quarter of 2019.
The Company has operating leases in place for some locations as well as equipment and is in the early stages of evaluating the
potential impact of adopting this amendment.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall:
Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update require: (1) all equity
investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted
for under equity method of accounting or those that result in consolidation of the investee); (2) an entity to present separately
in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific
credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial
instruments; and (3) eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair
value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business
entities. The new guidance is effective for the Company for annual and interim periods beginning in the first quarter of 2018.
Current evaluation would indicate that the primary area impacted by the amendments of this ASU will be our investment in Federal
Home Loan Bank stock, which is an equity security and does not have a readily determinable fair value. See Note 1 - Significant
Accounting Policies, “Federal Home Loan Bank Stock” for information regarding the Company’s investment. The adoption
of ASU 2016-01 is not anticipated to have a material effect on the Company’s consolidated financial statements.

7

Note 4: Investment Securities

The amortized costs and approximate fair values, together with gross
unrealized gains and losses on securities, are in the tables below. All mortgage-backed securities and collateralized mortgage
obligations held as of March 31, 2017 and December 31, 2016 were guaranteed by government sponsored entities, government corporations
or federal agencies.

March 31, 2017

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value

Available for Sale Securities

Mortgage-backed securities

$

88,353

$

738

$

(1,132

)

$

87,959

Collateralized mortgage obligations

72,884

244

(800

)

72,328

Municipal obligations

82,196

1,897

(1,084

)

83,009

Corporate obligations

12,822

91

(1,243

)

11,670

Total investment securities

$

256,255

$

2,970

$

(4,259

)

$

254,966

December 31, 2016

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value

Available for Sale Securities

Mortgage-backed securities

$

92,871

$

802

$

(1,156

)

$

92,517

Collateralized mortgage obligations

68,621

269

(843

)

68,047

Municipal obligations

77,474

1,716

(1,508

)

77,682

Corporate obligations

12,822

78

(1,233

)

11,667

Total investment securities

$

251,788

$

2,865

$

(4,740

)

$

249,913

The amortized cost and fair value of securities available for sale
at March 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Available for Sale

Description Securities

Amortized Cost

Fair Value

Security obligations due

Within one year

$

-

$

-

One to five years

5,396

5,389

Five to ten years

17,203

17,761

After ten years

72,419

71,529

95,018

94,679

Mortgage-backed securities

88,353

87,959

Collateralized mortgage obligations

72,884

72,328

Totals

$

256,255

$

254,966

Proceeds from sales of securities available for sale for the three
months ended March 31, 2017 and 2016 were $5.7 million and $3.9 million, respectively. Gross gains of $129,000 and $118,000 for
the three months ended March 31, 2017 and 2016, respectively, were recognized on those sales. There were no gross losses recognized
on the sales of securities for the three months ended March 31, 2017 or 2016.

Certain investments in debt securities are reported in the financial
statements at an amount less than their historical cost. Total fair value of these investments at March 31, 2017 and December 31,
2016 was $146.9 million and $143.8 million, respectively, which was approximately 57.6% of the Company’s investment portfolio
at each of those dates.

Based on our evaluation of available evidence, including recent changes
in market interest rates, management believes the fair value for the securities at less than historical cost for the periods presented,
are temporary.

8

Should the impairment of any of these securities become other than
temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary
impairment is identified.

During the first quarter of 2017 and 2016, the Bank determined that
its security holdings had no other-than-temporary impairment.

The following tables show the gross unrealized losses and fair value
of the Company’s investments, aggregated by investment category and length of time that individual securities have been in
a continuous unrealized loss position at March 31, 2017 and December 31, 2016:

The unrealized losses on the Company’s investment in MBSs and
CMOs were caused by interest rate changes and illiquidity. The Company expects to recover the amortized cost basis over the term
of the securities. Because (1) the decline in market value is attributable to changes in interest rates and illiquidity and not
credit quality, (2) the Company does not intend to sell the investments and (3) it is more likely than not the Company will not
be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company does not
consider any of these investments to be other-than-temporarily impaired at March 31, 2017.

Municipals

The unrealized losses on the Company’s investments in securities
of state and political subdivisions were caused by changes in interest rates and illiquidity. The contractual terms
of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The
Company does not intend to sell these investments and it is more likely than not that the Company will not be required to sell
these investments. The Company does not consider any of these investment securities to be other-than-temporarily impaired at March
31, 2017.

Corporate Obligations

The Company’s unrealized losses on investments in corporate
obligations primarily relates to two investments in pooled trust preferred securities. The unrealized losses were primarily caused
by (1) a decrease in performance and regulatory capital resulting from exposure to subprime mortgages and (2) a sector downgrade
by industry analysts. The Company recognized losses, in 2011 and earlier, equal to the credit losses for these securities, establishing
a new, lower amortized cost basis. The credit loss was calculated by comparing expected discounted cash flows based on performance
indicators of the underlying assets in the security to the carrying value of the investment. Because the Company does not intend
to sell these investments and it is likely that the Company will not be required to sell the investments before recovery of its
new, lower amortized cost basis, which may be at maturity, it does not consider the remainder of these investments to be other-than-temporarily
impaired at March 31, 2017.

9

Pooled Trust Preferred Securities. The Company
has invested in pooled trust preferred securities. At March 31, 2017, the current book balance of our pooled trust preferred securities
was $3.8 million. The original par value of these securities was $4.0 million prior to the OTTI write-downs in 2011 and earlier.
OTTI taken on trust preferred securities previously was the result of deterioration in the performance of the underlying collateral.
The deterioration was the result of increased defaults and deferrals of dividend payments in that year, creating credit impairment
along with weakening financial performance of performing collateral, increasing the risk of future deferrals of dividends and defaults.
No additional OTTI was determined in the first quarter of 2017. All pooled trust preferred securities owned by the Company are
exempt from the Volcker Rule.

The following table provides additional information
related to the Company’s investment in pooled trust preferred securities as of March 31, 2017:

A 10% recovery is applied to all projected defaults by depository institutions. A 15% recovery is applied to all projected
defaults by insurance companies. No recovery is applied to current defaults.

(2)

Excess subordination represents the additional defaults in excess of both current and projected defaults that the CDO can absorb
before the bond experiences any credit impairment. Excess subordinated percentage is calculated by (a) determining what percentage
of defaults a deal can experience before the bond has credit impairment, and (b) subtracting from this default breakage percentage
both total current and expected future default percentages.

10

Note 5: Loans and Allowance

Classes of loans at March 31, 2017 and December 31, 2016 include:

March 31,

December 31,

2017

2016

Real estate

Commercial

$

301,840

$

302,577

Commercial construction and development

26,840

22,453

Consumer closed end first mortgage

475,347

478,848

Consumer open end and junior liens

69,798

71,222

Total real estate loans

873,825

875,100

Other loans

Consumer loans

Auto

18,436

18,939

Boat/RVs

145,656

141,602

Other

5,671

5,892

Commercial and industrial

127,799

131,103

Total other loans

297,562

297,536

Total loans

1,171,387

1,172,636

Undisbursed loans in process

(9,636

)

(8,691

)

Unamortized deferred loan costs, net

5,574

5,557

Allowance for loan losses

(12,382

)

(12,382

)

Net loans

$

1,154,943

$

1,157,120

The risk characteristics of each loan portfolio segment are
as follows:

Commercial

Real estate

These loans are viewed primarily as cash flow loans and secondarily
as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment
of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on
the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets
or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of
type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and
risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors
are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus
non-owner occupied loans.

Construction and Development

Construction loans are underwritten utilizing feasibility studies,
independent appraisal reviews, sensitivity analyses of absorption and lease rates and financial analyses of the developers and
property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These
estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially
dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent
loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent
financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other
real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property,
general economic conditions and the availability of long-term financing.

Commercial and Industrial

Commercial loans are primarily based on the identified cash flows
of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may
not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets
being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however,
some loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for
the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

11

Consumer Real Estate and Other Consumer Loans

With respect to residential loans that are secured by consumer closed
end first mortgages and are primarily owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires
PMI if that ratio is exceeded. Consumer open end and junior lien loans are typically secured by a subordinate interest in 1-4 family
residences, and other consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer
loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent
on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment
levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that
the loans are of smaller individual amounts and spread over a large number of borrowers.

Nonaccrual Loans and Past Due Loans

Loans are considered past due if the required principal and interest
payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s
opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions,
but never greater than 90 days past due.

All interest accrued but not collected for loans that are placed
on nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis
or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments are reasonably assured and generally only after
six months of satisfactory performance.

Nonaccrual loans, segregated by class of loans, as of March 31, 2017
and December 31, 2016 are as follows:

March 31,

December 31,

2017

2016

Real estate

Commercial

$

1,054

$

912

Commercial construction and development

-

-

Consumer closed end first mortgage

3,179

3,626

Consumer open end and junior liens

286

335

Consumer loans

Auto

5

5

Boat/RVs

128

224

Other

34

24

Commercial and industrial

86

18

Total nonaccrual loans

$

4,772

$

5,144

12

An age analysis of the Company’s past due loans, segregated
by class of loans, as of March 31, 2017 and December 31, 2016 are as follows:

March 31, 2017

30-59
Days Past Due

60-89
Days Past Due

90 Days
or More Past Due

Total
Past Due

Current

Total
Loans Receivable

Total
Loans 90 Days Past Due and Accruing

Real estate

Commercial

$

2,336

$

61

$

931

$

3,328

$

298,512

$

301,840

$

-

Commercial construction and development

279

-

-

279

26,561

26,840

-

Consumer closed end first mortgage

3,555

628

2,834

7,017

468,330

475,347

-

Consumer open end and junior liens

170

121

215

506

69,292

69,798

-

Consumer loans

Auto

31

12

2

45

18,391

18,436

-

Boat/RVs

794

147

52

993

144,663

145,656

-

Other

53

3

21

77

5,594

5,671

-

Commercial and industrial

403

13

81

497

127,302

127,799

-

Total

$

7,621

$

985

$

4,136

$

12,742

$

1,158,645

$

1,171,387

$

-

December 31, 2016

30-59
Days Past Due

60-89
Days Past Due

90 Days
or More Past Due

Total
Past Due

Current

Total
Loans Receivable

Total
Loans 90 Days Past Due and Accruing

Real estate

Commercial

$

854

$

142

$

785

$

1,781

$

300,796

$

302,577

$

-

Commercial construction and development

-

-

-

-

22,453

22,453

-

Consumer closed end first mortgage

6,789

1,554

3,675

12,018

466,830

478,848

237

Consumer open end and junior liens

512

166

304

982

70,240

71,222

-

Consumer loans

Auto

103

25

5

133

18,806

18,939

-

Boat/RVs

1,376

305

213

1,894

139,708

141,602

-

Other

89

26

13

128

5,764

5,892

-

Commercial and industrial

497

32

8

537

130,566

131,103

-

Total

$

10,220

$

2,250

$

5,003

$

17,473

$

1,155,163

$

1,172,636

$

237

Impaired Loans

Loans are considered impaired in accordance with the impairment accounting
guidance (ASC 310-10-35-16), when, based on current information and events, it is probable the Company will be unable to collect
all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans
but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial
difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of
principal, forbearance or other actions intended to maximize collection.

Interest on impaired loans is recorded based on the performance of
the loan. All interest received on impaired loans that are on nonaccrual status is accounted for on the cash-basis method until
qualifying for return to accrual status. Interest is accrued per the contract for impaired loans that are performing.

13

The following tables present impaired loans as of and for the three
month periods ended March 31, 2017 and 2016 and the year ended December 31, 2016.

March 31, 2017

Recorded Balance

Unpaid Principal Balance

Specific Allowance

Average Investment in Impaired Loans

Interest Income Recognized

Loans without a specific valuation allowance

Real estate

Commercial

$

813

$

813

$

-

$

739

$

-

Commercial construction and development

792

792

-

807

9

Consumer closed end first mortgage

1,850

1,850

-

1,859

-

Commercial and industrial

179

179

-

183

1

Loans with a specific valuation allowance

Real estate

Commercial

214

214

100

214

-

Total

Real estate

Commercial

$

1,027

$

1,027

$

100

$

953

$

-

Commercial construction and development

$

792

$

792

$

-

$

807

$

9

Consumer closed end first mortgage

$

1,850

$

1,850

$

-

$

1,859

$

-

Commercial and industrial

$

179

$

179

$

-

$

183

$

1

Total

$

3,848

$

3,848

$

100

$

3,802

$

10

December 31, 2016

Recorded Balance

Unpaid Principal Balance

Specific Allowance

Average Investment in Impaired Loans

Interest Income Recognized

Loans without a specific valuation allowance

Real estate

Commercial

$

665

$

665

$

-

$

2,207

$

68

Commercial construction and development

822

822

-

874

40

Consumer closed end first mortgage

1,869

1,869

-

1,328

-

Consumer open end and junior liens

-

-

-

193

-

Commercial and industrial

187

187

-

204

1

Loans with a specific valuation allowance

Real estate

Commercial

214

214

100

416

-

Total

Real estate

Commercial

$

879

$

879

$

100

$

2,623

$

68

Commercial construction and development

$

822

$

822

$

-

$

874

$

40

Consumer closed end first mortgage

$

1,869

$

1,869

$

-

$

1,328

$

-

Consumer open end and junior liens

$

-

$

-

$

-

$

193

$

-

Commercial and industrial

$

187

$

187

$

-

$

204

$

1

Total

$

3,757

$

3,757

$

100

$

5,222

$

109

14

March 31, 2016

Recorded Balance

Unpaid Principal Balance

Specific Allowance

Average Investment in Impaired Loans

Interest Income Recognized

Loans without a specific valuation allowance

Real estate

Commercial

$

3,150

$

3,150

$

-

$

3,172

$

23

Commercial construction and development

859

859

-

934

12

Consumer closed end first mortgage

1,126

1,126

-

1,126

-

Consumer open end and junior liens

485

485

-

483

-

Commercial and industrial

208

208

-

212

-

Loans with a specific valuation allowance

Real estate

Commercial

517

517

100

596

-

Total

Real estate

Commercial

$

3,667

$

3,667

$

100

$

3,768

$

23

Commercial construction and development

$

859

$

859

$

-

$

934

$

12

Consumer closed end first mortgage

$

1,126

$

1,126

$

-

$

1,126

$

-

Consumer open end and junior liens

$

485

$

485

$

-

$

483

$

-

Commercial and industrial

$

208

$

208

$

-

$

212

$

-

Total

$

6,345

$

6,345

$

100

$

6,523

$

35

The following information presents the credit risk profile of the
Company’s loan portfolio based on rating category and payment activity as of March 31, 2017.

Commercial Loan Grades

Definition of Loan Grades. Loan grades are numbered 1 through
8. Grades 1-4 are "pass" credits, grade 5 [Special Mention] loans are "criticized" assets, and grades 6 [Substandard],
7 [Doubtful] and 8 [Loss] are "classified" assets. The use and application of these grades by the Bank conform to the
Bank's policy and regulatory definitions.

Pass. Pass credits are loans in grades prime through fair.
These are at least considered to be credits with acceptable risks and would be granted in the normal course of lending operations.

Special Mention. Special mention credits have potential weaknesses
that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of
the repayment prospects for the credits or in the Bank’s credit position at some future date. If weaknesses cannot be identified,
classifying as special mention is not appropriate. Special mention credits are not adversely classified and do not expose the Bank
to sufficient risk to warrant an adverse classification. No apparent loss of principal or interest is expected.

Substandard. Substandard credits are inadequately protected
by the current sound worth and paying capacity of the obligor or by the collateral pledged. Financial statements normally reveal
some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence
of creditor protection. Credits so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation
of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not
corrected.

Doubtful. A doubtful extension of credit has all the
weaknesses inherent in a substandard asset with the added characteristic that the weaknesses make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of
loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage
and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.
Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional
collateral, and refinancing plans. Doubtful classification for an entire credit should be avoided when collection of a specific
portion appears highly probable with the adequately secured portion graded Substandard.

15

Consumer Loan Grades

Pass. Pass credits are loans that are currently performing
as agreed and are not troubled debt restructurings.

Special Mention. Special mention credits have potential weaknesses
that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of
the repayment prospects for the credits or in the Bank’s credit position at some future date. If weaknesses cannot be identified,
classifying as special mention is not appropriate. Special mention credits are not adversely classified and do not expose the Bank
to sufficient risk to warrant an adverse classification. No apparent loss of principal or interest is expected.

Substandard. Substandard credits are loans that have reason
to be considered to have a weakness and placed on non-accrual. This would include all retail loans over 90 days and troubled debt
restructurings.

March 31, 2017

Commercial

Consumer

Pass

Special
Mention

Substandard

Doubtful

Pass

Special
Mention

Substandard

Total

Real estate

Commercial

$

295,099

$

3,267

$

3,449

$

25

$

301,840

Commercial construction and development

25,769

279

792

-

26,840

Consumer closed end first mortgage

$

470,138

$

-

$

5,209

475,347

Consumer open end and junior liens

69,421

-

377

69,798

Other loans

Consumer loans

Auto

18,428

-

8

18,436

Boat/RVs

145,472

-

184

145,656

Other

5,606

-

65

5,671

Commercial and industrial

125,422

2,287

90

-

127,799

$

446,290

$

5,833

$

4,331

$

25

$

709,065

$

-

$

5,843

$

1,171,387

December 31, 2016

Commercial

Consumer

Pass

SpecialMention

Substandard

Doubtful

Pass

SpecialMention

Substandard

Total

Real estate

Commercial

$

295,548

$

3,705

$

3,297

$

27

$

302,577

Commercial construction and development

21,782

254

417

-

22,453

Consumer closed end first mortgage

$

473,329

$

-

$

5,519

478,848

Consumer open end and junior liens

70,769

-

453

71,222

Other loans

Consumer loans

Auto

18,931

-

8

18,939

Boat/RVs

141,294

-

308

141,602

Other

5,859

-

33

5,892

Commercial and industrial

128,436

2,513

154

-

131,103

$

445,766

$

6,472

$

3,868

$

27

$

710,182

$

-

$

6,321

$

1,172,636

16

Allowance for Loan Losses.

We maintain an allowance for loan losses to absorb losses inherent
in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated losses inherent in the loan portfolio. Our
methodology for assessing the appropriateness of the allowance consists of several key elements, including the general allowance
and specific allowances for identified problem loans and portfolio segments. In addition, the allowance incorporates
the results of measuring impaired loans as provided in FASB ASC 310, Receivables. These accounting standards prescribe
the measurement methods, income recognition and disclosures related to impaired loans. The general allowance is calculated by applying
loss factors to outstanding loans based on the internal risk evaluation of such loans or pools of loans. Changes in risk evaluations
of both performing and nonperforming loans affect the amount of the general allowance. Loss factors are based on our historical
loss experience as well as on significant factors that, in management’s judgment, affect the collectability of the portfolio
as of the evaluation date.

The appropriateness of the allowance is reviewed by management based
upon its evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such
as credit quality trends (including trends in non-performing loans expected to result from existing conditions), collateral values,
loan volumes and concentrations, specific industry conditions within portfolio segments and recent loss experience in particular
segments of the portfolio that existed as of the balance sheet date and the impact that such conditions were believed to have had
on the collectability of the loan. Senior management reviews these conditions quarterly in discussions with our senior
credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit
or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as
a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced
by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of
the loss related to this condition is reflected in the general allowance for loan losses. The evaluation of the inherent
loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific
problem credits or portfolio segments.

The allowance for loan losses is based on estimates of losses inherent
in the loan portfolio. Actual losses can vary significantly from the estimated amounts. Our methodology as
described permits adjustments to any loss factor used in the computation of the general allowance in the event that, in management’s
judgment, significant factors which affect the collectability of the portfolio as of the evaluation date are not reflected in the
loss factors. By assessing the probable incurred losses inherent in the loan portfolio on a quarterly basis, we are
able to adjust specific and inherent loss estimates based upon any more recent information that has become available.

The following table details activity in the allowance for loan losses
by portfolio segment for the three month periods ended March 31, 2017 and 2016, respectively. Allocation of a portion of the allowance
to one category of loans does not preclude its availability to absorb losses in other segments.

Three Months Ended March 31, 2017

Commercial

Mortgage

Consumer

Total

Allowance for loan losses:

Balance, beginning of period

$

7,358

$

2,303

$

2,721

$

12,382

Provision charged to expense

32

17

151

200

Losses charged off

-

(45

)

(204

)

(249

)

Recoveries

7

4

38

49

Balance, end of period

$

7,397

$

2,279

$

2,706

$

12,382

Three Months Ended March 31, 2016

Commercial

Mortgage

Consumer

Total

Allowance for loan losses:

Balance, beginning of period

$

7,090

$

2,683

$

2,868

$

12,641

Provision charged to expense

120

62

18

200

Losses charged off

(4

)

(120

)

(138

)

(262

)

Recoveries

2

4

85

91

Balance, end of period

$

7,208

$

2,629

$

2,833

$

12,670

17

The following tables provide a breakdown of the allowance for loan
losses and loan portfolio balances by segment as of March 31, 2017 and 2016, and December 31, 2016.

March 31, 2017

Commercial

Mortgage

Consumer

Total

Allowance balances

Individually evaluated for impairment

$

100

$

-

$

-

$

100

Collectively evaluated for impairment

7,297

2,279

2,706

12,282

Total allowance for loan losses

$

7,397

$

2,279

$

2,706

$

12,382

Loan balances

Individually evaluated for impairment

$

1,998

$

1,850

$

-

$

3,848

Collectively evaluated for impairment

454,481

473,497

239,561

1,167,539

Gross loans

$

456,479

$

475,347

$

239,561

$

1,171,387

March 31, 2016

Commercial

Mortgage

Consumer

Total

Allowance balances

Individually evaluated for impairment

$

100

$

-

$

-

$

100

Collectively evaluated for impairment

7,108

2,629

2,833

12,570

Total allowance for loan losses

$

7,208

$

2,629

$

2,833

$

12,670

Loan balances

Individually evaluated for impairment

$

4,734

$

1,126

$

485

$

6,345

Collectively evaluated for impairment

380,473

486,263

218,527

1,085,263

Gross loans

$

385,207

$

487,389

$

219,012

$

1,091,608

December 31, 2016

Commercial

Mortgage

Consumer

Total

Allowance balances

Individually evaluated for impairment

$

100

$

-

$

-

$

100

Collectively evaluated for impairment

7,258

2,303

2,721

12,282

Total allowance for loan losses

$

7,358

$

2,303

$

2,721

$

12,382

Loan balances

Individually evaluated for impairment

$

1,888

$

1,869

$

-

$

3,757

Collectively evaluated for impairment

454,245

476,979

237,655

1,168,879

Gross loans

$

456,133

$

478,848

$

237,655

$

1,172,636

Management’s general practice is to proactively
charge down loans individually evaluated for impairment to the net realizable value of the underlying collateral.

For all loan portfolio segments except consumer real estate and other
consumer loans, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific
loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of
the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s
ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial
charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off consumer real estate and other consumer loans,
or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established
by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable
value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past
due, and charge-down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency
thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such
that collection will occur regardless of delinquency status, need not be charged-off.

18

Troubled Debt Restructurings

Certain categories of impaired loans include loans that have been
modified in a troubled debt restructuring; that involves granting economic concessions to borrowers who have experienced financial
difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest
rate, payment extensions, forgiveness of principal, forbearance or other actions. Modifications of terms for our loans and their
inclusion as troubled debt restructurings are based on individual facts and circumstances.

When we modify loans in a troubled debt restructuring, we evaluate
any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at
the contractual interest rate of the original loan agreement, or we use the current fair value of the collateral, less selling
costs for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment
in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized
through a specific reserve or a charge-off to the allowance.

Loans retain their accrual status at the time of their modification.
As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual until a period of satisfactory performance,
generally six months, is obtained. If a loan is on accrual at the time of the modification, the loan is evaluated to determine
if the collection of principal and interest is reasonably assured and generally stays on accrual.

At March 31, 2017, the Company had a number of loans that were modified
in troubled debt restructurings. The modification of terms of such loans included one or a combination of the following: an extension
of maturity or a reduction of the stated interest rate.

The following tables describe troubled debts restructured during
the three month periods ended March 31, 2017 and 2016:

Three Months Ended

March 31, 2017

March 31, 2016

No. ofLoans

Pre-ModificationRecordedBalance

Post-ModificationRecordedBalance

No. ofLoans

Pre-ModificationRecordedBalance

Post-ModificationRecordedBalance

Real estate

Consumer closed end first mortgage

1

$

65

$

67

5

$

419

$

428

Other loans

Consumer loans

Auto

-

-

-

1

4

7

Boat/RVs

-

-

-

2

48

48

Commercial and industrial

1

72

72

1

83

83

The impact on the allowance for loan losses was insignificant as
a result of these modifications.

Newly restructured loans by type for the three months ended March
31, 2017 and 2016 are as follows:

Three Months Ended March 31, 2017

Rate

Term

Combination

TotalModification

Real estate

Consumer closed end first mortgage

$

-

$

-

$

67

$

67

Other loans

Commercial and industrial

-

72

-

72

19

Three Months Ended March 31, 2016

Rate

Term

Combination

TotalModification

Real estate

Consumer closed end first mortgage

$

-

$

-

$

428

$

428

Other loans

Consumer loans

Auto

-

-

7

7

Boat/RVs

-

48

-

48

Commercial and industrial

-

83

-

83

There were no defaults on loans modified as troubled debt restructurings
made in the three months ended March 31, 2017 and 2016. Defaults are defined as any loans that become 90 days past due.

At March 31, 2017, the Company had residential real estate held for
sale as a result of foreclosure totaling $403,000 and real estate in the process of foreclosure of $1.6 million.

Note 6. Derivative FinancialInstruments

The Company has certain interest rate derivative positions that are
not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Balance
Sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Company to settle
all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral,
where applicable. These derivative positions relate to transactions in which the Company enters into an interest rate swap with
a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection
with each transaction, the Company agrees to pay interest to the client on a notional amount at a variable interest rate and receive
interest from the client on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay another
financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the
same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the
terms of the swaps with the customers and the other financial institution offset each other, with the only difference being counterparty
credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly
impact the Company’s Consolidated Statements of Income. The notional amount of customer-facing swaps as of March 31, 2017
and December 31, 2016 was approximately $14.5 million and $14.6 million, respectively.

The following table shows the amounts of derivative financial instruments
at March 31, 2017 and December 31, 2016.

Asset
Derivatives

Fair
Value

Fair
Value

Balance Sheet

March 31,

December 31,

Balance Sheet

March 31,

December 31,

Location

2017

2016

Location

2017

2016

Derivatives not designated as hedging instruments:

Interest
rate contracts

Other assets

$

561

$

553

Other liabilities

$

561

$

553

20

Note 7: Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss),
included in stockholders’ equity, are as follows:

March 31,

December 31,

2017

2016

Net unrealized loss on securities available-for-sale

$

(423

)

$

(1,009

)

Net unrealized loss on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income

(866

)

(866

)

Net unrealized gain relating to defined benefit plan liability

30

30

(1,259

)

(1,845

)

Tax benefit

396

591

Net of tax amount

$

(863

)

$

(1,254

)

The following table presents the reclassification adjustments out
of accumulated other comprehensive income that were included in net income in the Consolidated Statements of Income for the three
months ended March 31, 2017 and 2016.

Total non-interest income - net realized gains on sale
of available-for-sale securities

Related income tax expense

(44

)

(40

)

Income tax expense

Total reclassifications for the period, net
of tax

$

85

$

78

Note 8:Fair Values of Financial Instruments

Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements
must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of
inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets
or liabilities

Level 2

Observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable
or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3

Unobservable inputs supported by little or no market
activity and are significant to the fair value of the assets or liabilities

Items Measured at Fair Value on a Recurring Basis

Following is a description of the valuation methodologies and inputs
used for instruments measured at fair value on a recurring basis and recognized in the accompanying comparative balance sheet,
as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities
are classified within Level 1 of the valuation hierarchy. The Company uses a third-party provider to provide market prices
on its securities. Pooled trust preferred securities prices are evaluated by a third party. Level 1 securities include marketable
equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices
of securities with similar characteristics or discounted cash flows. Level 2 securities include mortgage-backed, collateralized
mortgage obligations, small business administration, marketable equity, municipal, federal agency and certain corporate obligation
securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of
the hierarchy and include certain corporate obligation securities.

21

Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to
determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely
used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment
securities but rather relying on investment securities relationship to other benchmark quoted investment securities. Any investment
security not valued based upon the methods above are considered Level 3.

The following table presents the fair value measurements of assets
measured on a recurring basis and level within the ASC 820 fair value hierarchy.

Fair Value Measurements Using

Fair Value

Level 1

Level 2

Level 3

March 31, 2017

Mortgage-backed securities

$

87,959

$

-

$

87,959

$

-

Collateralized mortgage obligations

72,328

-

72,328

-

Municipal obligations

83,009

-

83,009

-

Corporate obligations

11,670

-

9,082

2,588

Available-for-sale securities

$

254,966

$

-

$

252,378

$

2,588

Fair Value Measurements Using

Fair Value

Level 1

Level 2

Level 3

December 31, 2016

Mortgage-backed securities

$

92,517

$

-

$

92,517

$

-

Collateralized mortgage obligations

68,047

-

68,047

-

Municipal obligations

77,682

-

77,682

-

Corporate obligations

11,667

-

9,079

2,588

Available-for-sale securities

$

249,913

$

-

$

247,325

$

2,588

The following is a reconciliation of the beginning and ending balances
for the three months ended March 31, 2017 and 2016 of recurring fair value measurements recognized in the accompanying balance
sheets using significant unobservable (Level 3) inputs:

Three Months Ended

March 31,

2017

2016

Beginning balance

$

2,588

$

2,534

Total realized and unrealized gains (losses)

Included in net income

-

-

Included in other comprehensive income (loss)

-

-

Purchases, issuances and settlements

-

-

Ending balance

$

2,588

$

2,534

Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date

$

-

$

-

Items Measured at Fair Value on a Non-Recurring Basis

From time to time, certain assets may be recorded at fair value on
a non-recurring basis. These non-recurring fair value adjustments typically are a result of the application of lower of cost or
fair value accounting or a write-down occurring during the period. The following is a description of the valuation methodologies
used for certain assets that are recorded at fair value.

22

The following table presents quantitative information about unobservable
inputs used in recurring and nonrecurring Level 3 fair value measurements:

March 31, 2017

Fair Value

Valuation Technique

Unobservable Inputs

Range

Trust Preferred Securities

$

2,588

Discounted cash flow

Discount rate

7.0 - 8.0

%

Constant prepayment rate

2.0

%

Cumulative projected prepayments

40.0

%

Probability of default

1.7 - 2.2

%

Projected cures given deferral

0 - 15.0

%

Loss severity

32.5 - 38.7

%

December 31, 2016

Fair Value

Valuation Technique

Unobservable Inputs

Range

Trust Preferred Securities

$

2,588

Discounted cash flow

Discount rate

7.0 - 8.0

%

Constant prepayment rate

2.0

%

Cumulative projected prepayments

40.0

%

Probability of default

1.7 - 2.2

%

Projected cures given deferral

0 - 15.0

%

Loss severity

32.5 - 38.7

%

The following methods and assumptions were used to estimate the fair
value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value:

Deposits - The fair values of noninterest-bearing, interest-bearing
demand and savings accounts are equal to the amount payable on demand at the balance sheet date. Fair values for fixed-rate certificates
of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.

FHLB Advances - The fair value of these borrowings is estimated
using a discounted cash flow calculation, based on current rates for similar debt for periods comparable to the remaining terms
to maturity of these advances.

Other Borrowings - The fair value of these borrowings is estimated
using discounted cash flow analyses using interest rates for similar financial instruments.

Off-Balance Sheet Commitments - Commitments include commitments
to purchase and originate mortgage loans, commitments to sell mortgage loans, and standby letters of credit and are generally of
a short-term nature. The fair values of such commitments are based on fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these
instruments is insignificant.

23

The estimated fair values of the Company’s financial instruments
not carried at fair value in the consolidated balance sheets as of the dates noted below are as follows:

Fair Value Measurements Using

March 31, 2017

Carrying Amount

Fair Value

Level 1

Level 2

Level 3

Assets

Cash and cash equivalents

$

22,304

$

22,304

$

22,304

$

-

$

-

Interest-bearing time deposits

1,905

1,905

1,905

-

-

Loans held for sale

5,077

5,128

-

5,128

-

Loans, net

1,154,943

1,137,064

-

-

1,137,064

FHLB stock

11,183

11,183

-

11,183

-

Interest receivable

4,372

4,372

-

4,372

-

Liabilities

Deposits

1,170,923

1,170,835

797,167

-

373,668

FHLB advances

218,191

217,575

-

217,575

-

Other borrowings

4,490

4,528

-

4,528

-

Interest payable

454

454

-

454

-

Fair Value Measurements Using

December 31, 2016

Carrying Amount

Fair Value

Level 1

Level 2

Level 3

Assets

Cash and cash equivalents

$

26,860

$

25,795

$

25,795

$

-

$

-

Interest-bearing time deposits

993

993

993

-

-

Loans held for sale

4,063

4,094

-

4,094

-

Loans, net

1,157,120

1,139,450

-

-

1,139,450

FHLB stock

10,925

10,925

-

10,925

-

Interest receivable

4,629

4,629

-

4,629

-

Liabilities

Deposits

1,153,382

1,152,030

779,577

-

372,453

FHLB advances

240,591

239,866

-

239,866

-

Other borrowings

4,189

4,189

-

4,189

-

Interest payable

350

350

-

350

-

Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operation

The following should be read in conjunction
with the Management’s Discussion and Analysis in Item 7 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016, which was filed with the SEC on March 16, 2017.

MutualFirst is a Maryland corporation and a bank holding company
headquartered in Muncie, Indiana, with operations in Allen, Delaware, Elkhart, Grant, Kosciusko, Randolph, St. Joseph and Wabash
counties in Indiana. It owns MutualBank, an Indiana commercial bank with 27 full-service branches in Indiana, trust offices in
Fishers and Crawfordsville, Indiana and a loan origination office in New Buffalo, Michigan. MutualFirst also owns MutualFirst Risk
Management, Inc., a captive insurance company based in Nevada, and as of the first quarter 2016, Mutual Risk Advisors, a consulting
firm based in Indiana. MutualBank’s wholly owned subsidiary, Summit Service Corp, owns Summit Mortgage, a mortgage banking
company located in Ft. Wayne, Indiana. The Company is subject to examination, supervision and regulation by the Federal Reserve
Board (FRB), and the Bank is subject to regulation, supervision and examination by the Indiana Department of Financial Institutions
(IDFI) and the Federal Deposit Insurance Corporation (FDIC).

Our principal business consists of attracting retail and commercial
deposits from the general public and businesses, including some brokered deposits, and investing those funds primarily in loans
secured by consumer closed end first mortgages and consumer open end and junior liens on owner-occupied, one- to four-family residences,
a variety of other consumer loans, loans secured by commercial real estate, commercial construction and development and commercial
and industrial loans. Funds not invested in loans generally are invested in investment securities, including mortgage-backed, mortgage-related,
and municipal. We also obtain funds from FHLB advances and other borrowings.

24

Our results of operations depend primarily on the level of our net
interest income, which is the difference between interest income on interest-earning assets, such as loans and investment securities,
and interest expense on interest-bearing liabilities, primarily deposits and borrowings. The structure of our interest-earning
assets versus the structure of interest-bearing liabilities, along with the shape of the yield curve, has a direct impact on our
net interest income. Historically, our interest-earning assets have been longer term in nature (i.e., fixed-rate mortgage loans)
and interest-bearing liabilities have been shorter term (i.e., certificates of deposit, regular savings accounts, etc.). This structure
would impact net interest income favorably in a decreasing rate environment, assuming a normally shaped yield curve, as the rates
on interest-bearing liabilities would decrease more rapidly than rates on interest-earning assets. Conversely, in an increasing
rate environment, assuming a normally shaped yield curve, net interest income would be impacted unfavorably as rates on interest-earning
assets would increase at a slower rate than rates on interest-bearing liabilities.

First Quarter Highlights. At March 31, 2017, we had $1.6 billion
in assets, $1.2 billion in net loans, $1.2 billion in deposits and $142.6 million in stockholders’ equity. The Company’s
total risk-based capital ratio at March 31, 2017 was 13.4%, exceeding the 10.0% requirement for a well-capitalized institution.
Tangible common equity, as a percentage of tangible assets, increased to 9.1% as of March 31, 2017 compared to 8.9% and 9.2% at
December 31, 2016 and March 31, 2016, respectively. For the quarter ended March 31, 2017, net income was $3.2 million, or $0.43
diluted earnings per common share, compared with net income of $2.4 million, or $0.31 diluted earnings per common share for the
quarter ended March 31, 2016.

Financial highlights for the quarter ended March
31, 2017 included:

·

Deposits increased $17.5 million, or 6.1%
on an annualized basis in the first quarter of 2017.

·

Tangible book value per common share was
$19.13 as of March 31, 2017 compared to $18.82 as of December 31, 2016.

·

Net interest income for the first quarter
of 2017 increased by $144,000 on a linked quarter basis and increased by $951,000 compared to the first quarter of 2016.

·

Net interest margin was 3.21% for the first
quarter of 2017 compared to 3.20% in the fourth quarter of 2016 and 3.13% in the first quarter of 2016. Tax equivalent net interest
margin was 3.32% for the first quarter of 2017 compared to 3.30% in the fourth quarter of 2017 and 3.22% in the first quarter of
2016.

·

Provision for loan losses decreased in
the first quarter of 2017 by $50,000 compared to the linked quarter and was the same as the first quarter of 2016.

·

Non-interest income in the first quarter
of 2017 decreased by $342,000 on a linked quarter basis and increased by $127,000 when compared to the first quarter of 2016.

·

Non-interest expense decreased in the first
quarter of 2017 by $74,000 on a linked quarter basis and decreased by $10,000 when compared to the first quarter of 2016.

·

Efficiency ratio was 72.0% in the first
quarter of 2017 compared to 77.4% in the first quarter of 2016.

·

Four financial centers were closed during
the first quarter of 2017.

The Management’s Discussion and Analysis in Item 7 of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2016, contains a summary of our management’s strategic plan for
2015-2019. The financial highlights of our strategic progress during the quarter include:

·

Core deposits grew $16.5 million in the first quarter of 2017 and now
make up 68.1% of the deposit portfolio, up from 67.7% at December 31, 2016.

·

Commission income from wealth and investment services increased $96,000,
or 8.7%, during the first quarter 2017 compared to the same period in 2016.

Critical Accounting Policies

Note 1 to the Consolidated Financial Statements in Item 8 of the
Form 10-K for the year ended December 31, 2016 contains a summary of the Company’s significant accounting policies. Certain
of these policies are important to the portrayal of the Company’s financial condition, since they require management to make
difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes
that its critical accounting policies include determining the allowance for loan losses, the valuation of foreclosed assets, mortgage
servicing rights, valuation of intangible assets and securities, deferred tax asset and income tax accounting.

The determination of the adequacy of the allowance for loan losses
is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.
A worsening or protracted economic decline would increase the likelihood of additional losses due to credit and market risk and
could create the need for additional loss reserves.

Allowance for Loan Losses. The allowance for loan losses is
a significant estimate that can and does change based on management’s assumptions about specific borrowers and current general
economic and business conditions, among other factors. Management reviews the adequacy of the allowance for loan losses on at least
a quarterly basis. The evaluation by management includes consideration of past loss experience, changes in the composition of the
loan portfolio, the current condition and amount of loans outstanding, identified problem loans and the probability of collecting
all amounts due.

Foreclosed Assets. Foreclosed assets are carried at the lower
of cost or fair value less estimated selling costs. Management estimates the fair value of the properties based on current appraisal
information. Fair value estimates are particularly susceptible to significant changes in the economic environment, market conditions,
and real estate market. A worsening or protracted economic decline would increase the likelihood of a decline in property values
and could create the need to write down the properties through current operations.

25

Mortgage Servicing Rights. Mortgage servicing rights (“MSRs”)
associated with loans originated and sold, where servicing is retained, are capitalized and included in other assets in the consolidated
balance sheet. The value of the capitalized servicing rights represents the fair value of the right to service loans in the portfolio.
Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to
determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization
and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates,
mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically
reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are
compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount
rates. Impairment, if any, is recognized through a valuation allowance and is recorded as a reduction in loan servicing fee income.

Goodwill and Intangible Assets.MutualFirst periodically
assesses the impairment of its goodwill and the recoverability of its core deposit intangible. Impairment is the condition that
exists when the carrying amount exceeds its implied fair value. If actual external conditions and future operating results differ
fromMutualFirst’s judgments, impairment and/or increased amortization charges may be necessary to reduce the carrying
value of these assets to the appropriate value.

Securities. Under FASB Codification Topic 320 (ASC 320), Investments-Debt
and Equity Securities, investment securities must be classified as held-to-maturity, available-for-sale or trading. Management
determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly
impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held-to-maturity and carried
at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity. Securities
not classified as held-to-maturity are classified as available-for-sale and are carried at fair value, with the unrealized holding
gains and losses, net of tax, reported in other comprehensive income and do not affect earnings until realized.

The fair values of the Company’s securities are generally determined
by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of the Company’s fair
values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant
to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in
markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing
services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow
analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities.

The Company evaluates all securities on a quarterly basis, and more
frequently when economic conditions warrant additional evaluations, for determining if an other-than-temporary impairment (“OTTI”)
exists pursuant to guidelines established in ASC 320. In evaluating the possible impairment of securities, consideration is given
to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects
of the issuer, and the ability and intent of the Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider
whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades
by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

If management determines that an investment experienced an OTTI,
management must then determine the amount of the OTTI to be recognized in earnings. If management does not intend to sell the security
and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost
basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related
to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected
to be collected and is recognized in earnings. The amount of the OTTI related to other factors will be recognized in other comprehensive
income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized
cost basis of the investment. If management intends to sell the security or more likely than not will be required to sell the security
before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal
to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Any
subsequent recoveries related to the value of these securities are recorded as an unrealized gain (as other comprehensive income
(loss) in stockholders’ equity) and not recognized in income until the security is ultimately sold.

The Company from time to time may dispose of an impaired security
in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can
be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.

Deferred Tax Asset. The Company has evaluated its deferred
tax asset to determine if it is more likely than not that the asset will be utilized in the future. The Company’s most recent
evaluation has determined that, except for the amounts represented by the valuation allowance in Note 15 to the Consolidated Financial
Statements in Item 8 of the Form 10-K for the year ended December 31, 2016, the Company will more likely than not be able to utilize
the remaining deferred tax asset. As of year-end 2016, the Company had generated average annual positive pre-tax pre-provision
earnings of $16.4 million, or 1.1% of pre-tax pre-provision ROA over the previous five years. This level of earnings, if maintained
in the future, would be sufficient to utilize portions of the operating losses, tax credit carryforwards and temporary tax differences
over the allowable periods. The analysis as of March 31, 2017, supports no additional valuation reserve is needed.

The valuation allowances established are the result of net operating
losses for state franchise tax purposes totaling $23.0 million. See Note 15 to the Consolidated Financial Statements in Item 8
of the Form 10-K for the year ended December 31, 2016.

26

Income Tax Accounting. We file a consolidated federal income
tax return. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported
on our income tax return. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities
is recognized as income or expense in the period that includes the enactment date.

Forward-Looking Statements

This Form 10-Q contains, and our future filings with the SEC, Company
press releases, other public pronouncements, stockholder communications and oral statements made by or with the approval of an
authorized executive officer, will contain, “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. You can identify these forward-looking statements through our use of words such as “may,”
“will,” “anticipate,” “assume,” “should,” “indicate,” “would,”
“believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,”
“project,” “could,” “intend,” “target” and other similar words and expressions
of the future. These forward-looking statements include, but are not limited to: (i) statements of our goals, intentions and
expectations; (ii) statements regarding our business plans, prospects, growth and operating strategies; (iii) statements regarding
the asset quality of our loan and investment portfolios; and (iv) estimates of our risks and future costs and benefits. These forward-looking
statements are based on current beliefs and expectations of our management and are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking
statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The
Company does not undertake and specifically declines any obligation to publicly release the result of any revisions that may be
made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence
of unanticipated events.

The following factors, among others, could cause actual results to
differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (i) the credit
risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance
for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;
(ii) changes in general economic conditions, either nationally or in our market areas; (iii) changes in the levels of general interest
rates and the relative differences between short- and long-term interest rates, deposit interest rates, our net interest margin
and funding sources; (v) fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations
in real estate values in our market areas; (vi) decreases in the secondary market for the sale of loans that we originate; (vii)
results of examinations of us by the IDFI, FDIC, Federal Reserve Board (FRB) or other regulatory authorities, including the possibility
that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets,
change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely
affect our liquidity and earnings; (viii) legislative or regulatory changes that adversely affect our business including the effect
of Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act”), changes in regulatory policies and principles,
or the interpretation of regulatory capital or other rules, including changes that increase our capital requirements; (ix) our
ability to attract and retain deposits; (x) increases in premiums for deposit insurance; (xi) management’s assumptions in
determining the adequacy of the allowance for loan losses; (xii) our ability to control operating costs and expenses; (xiii) the
use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant
declines in valuation; (xiv) difficulties in reducing risks associated with the loans on our balance sheet; (xv) staffing fluctuations
in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated
charges; (xvi) a failure or security breach in the computer systems on which we depend; (xvii) our ability to retain key members
of our senior management team; (xviii) costs and effects of litigation, including settlements and judgments; (xix) our ability
to successfully integrate into our operations any assets, liabilities, customers, systems, and management personnel we may in the
future acquire and our ability to realize related revenue synergies and cost savings within expected time frames or at all and
any goodwill charges related thereto; (xx) increased competitive pressures among financial services companies; (xxi) changes in
consumer spending, borrowing and savings habits; (xxii) the availability of resources to address changes in laws, rules, or regulations
or to respond to regulatory actions; (xxiii) adverse changes in the securities markets; (xxiv) inability of key third-party providers
to perform their obligations to us; (xv) changes in accounting policies and practices, as may be adopted by the financial institution
regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board; and (xvi) other
economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services
and the other risks described elsewhere in this report.

The Company wishes to advise readers that these factors could affect
the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current statements.

Financial Condition

General. Total assets at March 31, 2017 were $1.6 billion,
reflecting a $1.7 million decrease since December 31, 2016, primarily as a result of a $2.2 million decrease in net loans. Average
interest-earning assets increased $12.5 million, or 0.9%, to $1.5 billion for the three months ended March 31, 2017 compared to
the three months ended December 31, 2016, reflecting an increase in the average loan portfolio of $11.4 million. Average interest-bearing
liabilities remained relatively unchanged with a small decrease of $167,000, at March 31, 2017 compared to December 31, 2016. Although
the change was minor in total, we did see an increase in average total deposits of $9.6 million offset by a decrease in average
borrowings of $9.8 million. Average stockholders’ equity decreased by $192,000, or 0.1%, during the three months ended March
31, 2017 compared the three months ended December 31, 2016 due to accumulated other comprehensive losses on investments securities
available-for-sale earlier in the quarter.

27

Loans. The following table reflects the changes in the gross
amount of loans, excluding loans held for sale, by type during the three month period:

March 31,

December 31,

Amount

Percent

2017

2016

Change

Change

Real estate

Commercial

$

301,840

$

302,577

$

(737

)

(0.24

)%

Commercial construction and development

26,840

22,453

4,387

19.54

Consumer closed end first mortgage

475,347

478,848

(3,501

)

(0.73

)

Consumer open end and junior liens

69,798

71,222

(1,424

)

(2.00

)

Total real estate loans

873,825

875,100

(1,275

)

(0.15

)

Consumer loans

Auto

18,436

18,939

(503

)

(2.66

)

Boat/RV

145,656

141,602

4,054

2.86

Other

5,671

5,892

(221

)

(3.75

)

Total consumer other

169,763

166,433

3,330

2.00

Commercial and industrial

127,799

131,103

(3,304

)

(2.52

)

Total other loans

297,562

297,536

26

0.01

Total Gross Loans

$

1,171,387

$

1,172,636

$

(1,249

)

(0.11

)%

The gross loan portfolio declined by $1.2 million, or 0.1% primarily
due to seasonality and a couple of large payoffs in the commercial loan portfolio. Despite loan balances remaining relatively flat,
primarily due to the large payoffs, production was stronger in the first quarter of 2017 compared to the first quarter of 2016.
The Company’s strategy to increase commercial and consumer loans remains a primary focus as the current commercial loan pipeline
is approximately 50% greater as of March 31, 2017 than December 31, 2016. We continue to seek to provide sound commercial borrowers
opportunities for new loans to meet their growing demands, refinance loans currently served by other financial institutions and
build relationships with commercial clients in our footprint. The Company continues to sell longer term fixed-rate mortgage loans
to reduce related interest rate risk.

Delinquencies and Non-performing Assets. As of March 31, 2017,
our total loans delinquent 30-to-89 days were $8.6 million or 0.7% of total loans, down from $12.5 million or 1.1% of total loans
at the year-end of 2016. This was primarily due to a decrease in consumer mortgage loans.

At March 31, 2017, our non-performing assets totaled $5.8 million
or 0.37% of total assets, compared to $6.6 million or 0.42% of total assets at December 31, 2016. This $774,000, or 11.8% decrease
was primarily due to a reduction in non-performing consumer closed end first mortgage loans. The table below sets forth the amounts
and categories of non-performing assets at the dates indicated.

March 31,

December 31,

Amount

Percent

2017

2016

Change

Change

Non-accruing loans

$

4,772

$

5,144

$

(372

)

(7.23

)%

Accruing loans delinquent 90 days

-

237

(237

)

(100.00

)

Foreclosed assets

1,034

1,199

(165

)

(13.76

)

Total

$

5,806

$

6,580

$

(774

)

(11.76

)%

The Company continues to diligently monitor and write down loans
that appear to have irreversible weakness. The Company works to ensure possible problem loans have been identified and steps have
been taken to reduce loss by restructuring loans to improve cash flow or by increasing collateral. In addition to the decrease
in non-performing assets, the Company has seen improvement during the first quarter of 2017 in total classified assets. Total classified
assets decreased by 1.6% from $11.4 million at December 31, 2016 to $11.2 million at March 31, 2017 due to improvements in the
economy in the local communities we serve.

At March 31, 2017, foreclosed real estate totaled $403,000. The Company
continues to experience a decrease in this area as overall real estate owned sales volumes are up and the number of foreclosures
is down. At March 31, 2017, all foreclosed real estate owned was in consumer residential real estate. As of March 31, 2017, the
Company also held $631,000 in other repossessed assets, such as autos, boats, RVs and horse trailers.

Allowance
for Loan Losses. Allowance for loan losses remained constant at $12.4 million as of March 31, 2017 compared to December 31,
2016. The allowance for loan losses to non-performing loans as of March 31, 2017 was 259.5% compared to 230.1% as of December 31,
2016. The allowance for loan losses to total loans as of March 31, 2017 was 1.06%, the same as of December 31, 2016. Non-performing
loans to total loans at March 31, 2017 were 0.41% compared to 0.46% at December 31, 2016. Non-performing assets to total assets
were 0.37% at March 31, 2017 compared to 0.42% at December 31, 2016.

28

Deposits. Deposits increased by $17.5 million as of March
31, 2017 compared to December 31, 2016. The increase in deposits was a result of an increase in core deposits of $16.5 million
and an increase of $1.0 million in certificates of deposit.

At

March 31, 2017

December 31, 2016

Amount

Weighted Average Rate

Amount

Weighted Average Rate

Type of Account:

Non-interest Checking

$

188,131

0.00

%

$

178,046

0.00

%

Interest-bearing NOW

292,918

0.32

292,977

0.27

Savings

139,962

0.01

136,314

0.01

Money Market

176,156

0.28

173,305

0.26

Certificates of Deposit

373,756

1.23

372,740

1.19

Total

$

1,170,923

0.52

%

$

1,153,382

0.49

%

Borrowings. Total borrowings decreased to $222.7 million at
March 31, 2017, down $22.1 million, or 9.0%, since year-end 2016 primarily due to a $22.4 million decrease in FHLB advances. This
decrease was primarily due to growth in deposit balances. Other borrowings, consisting of a subordinated debenture and fed funds
borrowings, increased $301,000 to $4.5 million at March 31, 2017.

Stockholders’ Equity. Stockholders’
equity was $142.6 million at March 31, 2017, an increase of $2.6 million from December 31, 2016. The increase was primarily due
to net income available to common shareholders of $3.2 million, an increase in accumulated other comprehensive income of $391,000
and an increase of $139,000 due to exercises of stock options. These increases were partially offset by common stock cash dividends
paid of $1.2 million during the first quarter of 2017. The Company’s tangible book value per common share as of March 31,
2017 increased to $19.13 compared to $18.82 as of December 31, 2016 and the tangible common equity ratio increased to 9.07% as
of March 31, 2017 compared to 8.89% as of December 31, 2016. MFSF’s and the Bank’s risk-based capital ratios were well
in excess of “well-capitalized” levels as defined by all regulatory standards as of March 31, 2017.

Comparison of Results of Operations for the Three Months Ended
March 31, 2017 and 2016.

General. Net income for the three months ended March
31, 2017 was $3.2 million, or $0.43 diluted earnings per common share compared to net income of $2.4 million, or $0.31 diluted
earnings per common share for the three months ended March 31, 2016. Annualized return on average assets was 0.82% and annualized
return on average tangible common equity was 9.23% for the first quarter of 2017 compared to 0.63% and 6.92% respectively, for
the same period of last year.

29

Net Interest Margin and Average Balance Sheet. The
following table presents the Company’s average balance sheet, interest income/interest expense, and the average rate as a
percent of average earning assets for the periods indicated. All average balances are daily average balances. Non-accruing loans
have been included in the table as loans carrying a zero yield.

Interest Income. Total interest income increased $1.1
million, or 8.2%, to $14.1 million during the three months ended March 31, 2017 from $13.0 million during the same period in 2016.
The increase was a result of an increase of $82.0 million in average earning assets due to an increase in the average loan portfolio
of $88.3 million in combination with an increase of eight basis points in the average interest rate for the quarter ended March
31, 2017 compared to the same period in 2016.

Interest Expense. Interest expense increased $124,000,
or 5.5%, to $2.4 million during the three months ended March 31, 2017 compared to the same period in 2016. The primary reason for
this increase was an increase of $74.6 million in average interest-bearing deposits which was partially offset by a decrease in
average interest-bearing borrowings of $8.0 million. The increase in interest-bearing deposits was due to our focus on core deposit
growth in combination with the need for loan funding.

30

Net Interest Income and Net Interest Margin. Net interest
income before the provision for loan losses increased $951,000 for the quarter ended March 31, 2017 compared to the same period
in 2016. The increase in net interest income was a result of an increase of $82.0 million in average interest earning assets, due
to an increase of $88.3 million in average loans, and an increase of eight basis points in net interest margin to 3.21%. On a linked
quarter basis, net interest income before the provision for loan losses increased $144,000 as net interest margin increased by
one basis point and average interest earning assets increased by $12.5 million, primarily due to increases in the average loan
portfolio. For more information on our asset/liability management especially as it relates to interest rate risk, see “Item
7A - Quantitative and Qualitative Disclosures About Market Risk” in the Form 10-K for the year ended December 31, 2016.

Provision for Loan Losses. Provision for loan losses
in the first quarter of 2017 was $200,000, the same as last year’s comparable period. Provision for loan losses was calculated
based on management’s ongoing evaluation of the adequacy of the allowance for loan losses, which is partially attributable
to net charge offs of $200,000, or 0.07% of total average loans on an annualized basis, in the first quarter of 2017 compared to
net charge offs of $171,000, or 0.06% of total average loans on an annualized basis, in the first quarter of 2016.

Non-Interest Income. Non-interest income for the first
quarter of 2017 was $4.1 million, an increase of $127,000 compared to the first quarter of 2016.

Three Months Ended March 31,

Amount

Percent

2017

2016

Change

Change

Service fee income

$

1,400

$

1,374

$

26

1.89

%

Net realized gain on sale of securities

129

118

11

9.32

Commissions

1,196

1,100

96

8.73

Net gains on sales of loans

770

940

(170

)

(18.09

)

Net servicing fees

101

70

31

44.29

Increase in cash surrender value of life insurance

272

284

(12

)

(4.23

)

Gain (loss) on sale of other real estate and repossessed assets

54

(29

)

83

(286.21

)

Other income

202

140

62

44.29

Total

$

4,124

$

3,997

$

127

3.18

%

Increases in non-interest income included an
increase of $96,000 in commission income due to increases in our trust and wealth management portfolios, an increase of $83,000
in gains on sale of other real estate and repossessed assets, and an increase of $26,000 in service fee income. These increases
were partially offset by a decrease of $170,000 in gain on sale of loans due to fewer loan sales compared to the first quarter
of 2016. On a linked quarter basis, non-interest income decreased $342,000 primarily due to a decrease of $307,000 in service fee
income generated from deposit accounts due to fourth quarter seasonality, which is typically the highest of the year.

Non-Interest Expense. Non-interest expenses decreased
$10,000, to $11.4 million, for the first quarter of 2017.

Three Months Ended March 31,

Amount

Percent

2017

2016

Change

Change

Salaries and employee benefits

$

6,726

$

6,491

$

235

3.62

%

Net occupancy expenses

809

646

163

25.23

Equipment expenses

427

487

(60

)

(12.32

)

Data processing fees

554

489

65

13.29

ATM and debit card expense

418

380

38

10.00

Deposit insurance

213

234

(21

)

(8.97

)

Professional fees

396

470

(74

)

(15.74

)

Advertising and promotion

312

427

(115

)

(26.93

)

Software subscriptions and maintenance

569

480

89

18.54

Other real estate and repossessed assets

47

72

(25

)

(34.72

)

Other expenses

935

1,240

(305

)

(24.60

)

Total

$

11,406

$

11,416

$

(10

)

(0.09

)%

The decrease was primarily due to a decrease
of $305,000 in other expenses and a decrease of $74,000
in professional fees primarily due to one-time expenses setting up our
captive insurance company in the first quarter of 2016 that were not repeated in the first quarter of 2017. These decreases were
offset by an increase of $235,000 in salaries and benefits primarily due to general compensation increases and an increase of $163,000
in occupancy expense due to a loss of rental income from an office building sold in the fourth quarter of 2016. On a linked quarter
basis, non-interest expense decreased $74,000 partially due to a decrease in salaries and benefits primarily due to reduced health
insurance expenses.

31

Income Tax Expense. The effective tax rate for the
first quarter of 2017 was 24.2% compared to 24.8% in the same quarter of 2016. The reason for the decline was due to an increase
in tax free income partially due to an increase in holdings of tax free municipal securities in the investment portfolio.

Reconciliation of Non-GAAP Financial Measures

The report on Form 10-Q contains financial information determined
by methods other than in accordance with U.S. generally accepted accounting principles (“GAAP”). Non-GAAP financial
measures are used by management to measure the strength of its capital and its ability to generate earnings on tangible capital
invested by its shareholders. Although the Company believes these non-GAAP measures provide a greater understanding of its business,
they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily
comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of these non-GAAP financial
measures to the most directly compared GAAP financial measures are included in the following table.

At and for the Three Months Ended

March 31,

December 31,

March 31,

2017

2016

2016

Total Stockholders' Equity (GAAP)

$

142,598

$

140,038

$

140,798

Less: Intangible Assets

(2,107

)

(2,191

)

(2,491

)

Tangible common equity (non-GAAP)

$

140,491

$

137,847

$

138,307

Total assets (GAAP)

$

1,551,421

$

1,553,133

$

1,499,232

Less: Intangible Assets

(2,107

)

(2,191

)

(2,491

)

Tangible assets (non-GAAP)

$

1,549,314

$

1,550,942

$

1,496,741

Tangible common equity to tangible assets (non-GAAP)

9.07

%

8.89

%

9.24

%

Book value per common share (GAAP)

$

19.42

$

19.12

$

18.87

Less: Effect of Intangible Assets

(0.29

)

(0.30

)

(0.33

)

Tangible book value per common share (non-GAAP)

$

19.13

$

18.82

$

18.54

Return on average stockholders' equity (GAAP)

9.09

%

9.17

6.80

%

Add: Effect of Intangible Assets

0.14

0.14

0.12

Return on average tangible common equity (non-GAAP)

9.23

%

9.31

%

6.92

%

Total tax free interest income (GAAP)

Loans receivable

$

107

$

110

$

77

Investment securities

647

614

460

Total tax free interest income

$

754

$

724

$

537

Total tax free interest income, gross (at 34% tax rate)

$

1,142

$

1,097

$

814

Net interest margin (GAAP)

3.21

%

3.21

%

3.13

%

Add: Tax effect tax free interest income at 34% tax rate

0.11

0.09

0.09

Net interest margin, tax equivalent

3.32

%

3.30

%

3.22

%

Ratio Summary:

Return on average equity (ROE)

9.09

%

9.17

%

6.80

%

Return on average tangible common equity

9.23

%

9.31

%

6.92

%

Return on average assets (ROA)

0.82

%

0.83

%

0.63

%

Tangible common equity to tangible assets

9.07

%

8.89

%

9.24

%

Net interest margin, tax equivalent

3.32

%

3.30

%

3.22

%

32

Liquidity

We are required to have enough cash and investments that qualify
as liquid assets in order to maintain sufficient liquidity to ensure safe and sound operation. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically,
we have maintained liquid assets above levels believed to be adequate to meet the requirements of normal operations, including
potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained.

Liquidity management involves the matching of cash flow requirements
of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will
be available to meet their credit needs and the ability of the Company to manage those requirements. The Company strives to maintain
an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities
so that the balance it has in short-term investments at any given time will cover adequately any reasonably anticipated, immediate
need for funds. Additionally, the Bank maintains relationships with correspondent banks, which could provide funds on short-term
notice if needed. Our liquidity, represented by cash and cash-equivalents and investment securities, is a product of our operating,
investing and financing activities.

Liquidity management is both a daily and long-term function of the
management of the Company and the Bank. It is overseen by the Asset and Liability Management Committee. The Board of Directors
required the Bank to maintain a minimum liquidity ratio of 10% of deposits. At March 31, 2017, our ratio was 24.1%. The Company
is currently in excess of the minimum liquidity ratio set by the Board due to a larger investment portfolio. Management continues
to seek to utilize liquidity off of the investment portfolio to fund loan growth over the next few years as demand for loans increases.
Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer term
basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed securities.
The Bank uses its sources of funds primarily to meet its ongoing commitments, pay maturing deposits, fund deposit withdrawals and
fund loan commitments.

We hold cash and investments that qualify as liquid assets to maintain
adequate liquidity to ensure safe and sound operation and meet demands for funds (particularly withdrawals of deposits). At March
31, 2017, on a consolidated basis, the Company had $279.2 million in cash and investment securities available for sale and $5.1
million in loans held for sale generally available for its cash needs. We can also generate funds from borrowings, primarily FHLB
advances and fed funds lines, and, to a lesser degree, third party loans. At March 31, 2017, the Bank had the ability to borrow
an additional $50.6 million in FHLB advances and $40.0 million in fed funds. In addition, we have historically sold 15- and 30-year,
primarily fixed-rate mortgage loans in the secondary market in order to reduce interest rate risk and to create another source
of liquidity. The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its own
operating expenses (many of which are paid to the Bank), the Company is responsible for paying amounts owed on its trust preferred
securities, any dividends declared to its common stockholders, and interest and principal on outstanding debt. The Company’s
primary source of funds is Bank dividends, the payment of which is subject to regulatory limits. At March 31, 2017, the Company,
on an unconsolidated basis, had $1.2 million in cash, interest-bearing deposits and liquid investments generally available for
its cash needs.

Our liquidity, represented by cash and cash equivalents and investment
securities, is a product of our operating, investing and financing activities. Our primary sources of funds are deposits, amortization,
prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term
investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities
and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic conditions and competition. In addition, we invest excess
funds in short-term interest-earning assets, which provide liquidity to meet lending requirements. We also generate cash through
borrowings. We utilize FHLB advances to leverage our capital base and provide funds for our lending and investment activities,
and to enhance our interest rate risk management.

We use our sources of funds primarily to meet ongoing commitments,
pay maturing deposits and fund withdrawals, and to fund loan commitments. At March 31, 2017, the approved outstanding loan commitments,
including unused lines of credit, amounted to $238.6 million. Certificates of deposit scheduled to mature in one year or less as
of March 31, 2017, totaled $186.0 million. It is management’s policy to offer deposit rates that are competitive with other
local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with
the Bank.

Except as set forth above, management is not aware of any trends,
events, or uncertainties that will have, or that are reasonably likely to have a material impact on liquidity, capital resources
or operations. Further, management is not aware of any current recommendations by regulatory agencies, which, if they were to be
implemented, would have this effect.

Off-Balance Sheet Activities

In the normal course of operations, the Bank engages in a variety
of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance
sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for
funding and take the form of loan commitments and lines of credit. We also have off-balance sheet obligations to repay borrowings
and deposits. For the quarter ended March 31, 2017, we engaged in no off-balance sheet transactions likely to have a material effect
on our financial condition, results of operations or cash flows. At March 31, 2017, the Bank had $126.3 million in commitments
to make loans, $9.7 million in undisbursed portions of closed loans, $99.9 million in unused lines of credit and $2.8 million in
standby letters of credit. In addition, on a consolidated basis, at March 31, 2017, the Company had $222.7 million in outstanding
borrowings, of which $59.9 million is due in the next twelve months.

33

Capital Resources

The Bank is subject to minimum capital requirements imposed by the
FDIC. See ‘Item 1 - Business- How We Are Regulated - Regulatory Capital Requirements’ of the Company’s Annual
Report on Form 10-K for the year ended December 31, 2016. The FDIC may require the Bank to have additional capital above the specific
regulatory levels if it believes the Bank is subject to increased risk due to asset problems, high interest rate risk and other
risks. The Company is subject to minimum capital requirements imposed by the FRB, which are substantially similar to those imposed
on the Bank, including guidelines for bank holding companies to be considered well-capitalized.

The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require adjustments
to regulatory capital not reflected in these financial statements.

Quantitative measures established by regulation to ensure capital
adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier I and
Common Equity Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital to average
assets (as defined). As of March 31, 2017, the Company and Bank meet all capital adequacy requirements to which it is subject.

The Basel III Capital Rules, among other things, (i) introduced a
new capital measure called “Common Equity Tier 1” (CET1), (ii) specify that Tier 1 capital consist of CET1 and “Additional
Tier 1 Capital” instruments meeting specified requirements, (iii) defined CET1 narrowly by requiring that most deductions/adjustments
to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expanded the scope of the deductions/adjustments
as compared to existing regulations.

Implementation of the deductions and other adjustments to CET1 began
on January 1, 2015, and will phase in over a four-year period (beginning at 40% on January 1, 2015, and an additional 20% per year
thereafter). Under the new rule, in order to avoid limitations on capital distributions, including dividend payments and certain
discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of
CET1 capital above its minimum risk-based capital requirements. The implementation of the capital conservation buffer began on
January 1, 2016, at the 0.625% level and will continue to phase in over a four-year period (increasing by that amount on each subsequent
January 1 until it reaches 2.5% on January 1, 2019). As of March 31, 2017, the Bank and Company exceeded the minimum buffer requirement
which was 1.250%.

The Company’s and Bank’s actual capital amounts and ratios
as of March 31, 2017, are presented in the table below.

Actual Capital Levels

Minimum Regulatory Capital Levels

Minimum Required To be Considered Well-
Capitalized

Amount

Ratio

Amount

Ratio

Amount

Ratio

Leverage Capital Level(1):

MutualFirst Consolidated

$

141,209

9.1

%

$

61,951

4.0

%

N/A

N/A

MutualBank

138,222

8.9

61,994

4.0

$

77,493

5.0

%

Common Equity Tier 1 Capital Level (2) :

MutualFirst Consolidated

$

137,915

12.0

%

$

51,660

4.5

%

N/A

N/A

MutualBank

138,222

12.0

51,641

4.5

$

74,593

6.5

%

Tier 1 Risk-Based Capital Level (3) :

MutualFirst Consolidated

$

141,209

12.3

%

$

68,880

6.0

%

N/A

N/A

MutualBank

138,222

12.0

68,855

6.0

$

91,806

8.0

%

Total Risk-Based Capital Level (4) :

MutualFirst Consolidated

$

153,591

13.4

%

$

91,841

8.0

%

N/A

N/A

MutualBank

150,604

13.1

91,806

8.0

$

114,758

10.0

%

(1) Tier 1 Capital to Assets for Leverage Ratio of
$1.5 billion for the Bank and Company at March 31, 2017.

(2) Common Equity Tier 1 Capital to Risk-Weighted
Assets of $1.1 billion for the Bank and Company at March 31, 2017.

(3) Tier 1 Capital to Risk-Weighted Assets.

(4) Total Capital to Risk-Weighted Assets.

Impact of Inflation

The effects of price changes and inflation can vary substantially
for most financial institutions. While management believes that inflation affects the economic value of total assets, it believes
that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither
the timing nor the magnitude of the inflationary changes in the consumer price index (“CPI”) coincides with changes
in interest rates. For example, the price of one or more of the components of the CPI may fluctuate considerably and thereby influence
the overall CPI without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased
by us. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby
adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans. In addition,
higher short-term interest rates caused by inflation tend to increase the cost of funds. In other years, the opposite may occur.

34

Item 3 Quantitative and Qualitative Disclosures About Market Risk

Information about the Company’s asset
and liability management and market and interest-rate risks is included in Item 7A of the Form 10-K for the year ended December
31, 2016, filed with the SEC on March 16, 2017.

Asset and Liability Management and Market Risk

Our Risk When Interest Rates Change. The rates of interest
we earn on assets and pay on liabilities generally is established contractually for a period of time. Market interest rates change
over time. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest
rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our
ability to adapt to these changes is known as interest rate risk and is one of our most significant market risks.

Management continues to evaluate options to mitigate interest rate
risk in an increasing interest rate environment during this cycle of extremely low interest rates. This includes shortening assets
and lengthening liabilities when possible.

How We Measure Our Risk of Interest Rate Changes. As
part of our attempt to manage our exposure to changes in interest rates, we monitor our interest rate risk. In monitoring interest
rate risk, we continually analyze and manage assets and liabilities based on their payment streams and interest rates, the timing
of their maturities and their sensitivity to actual or potential changes in market interest rates. In order to minimize the potential
for adverse effects of material and prolonged changes in interest rates on our results of operations, the Bank’s board of
directors establishes asset and liability management policies to better match the maturities and repricing terms of our interest-earning
assets and interest-bearing liabilities.

These asset and liability policies are implemented by the Asset and
Liability Management Committee, which is chaired by the Chief Financial Officer and is comprised of members of our senior management
team. The purpose of the Asset and Liability Management Committee is to communicate, coordinate and control asset/liability management
issues consistent with our business plan and board-approved policies. The committee establishes and monitors the volume and mix
of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The
objective of these actions is to manage assets and funding sources consistent with liquidity, capital adequacy, growth, risk and
profitability goals. The Asset and Liability Management Committee generally meets monthly to review, among other things, economic
conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume
and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to a net present value
of portfolio equity analysis and income simulations. At each meeting, the Asset and Liability Management Committee recommends appropriate
strategy changes based on this review. The Chief Financial Officer is responsible for reviewing and reporting on the effects of
the policy implementations and strategies to the Board of Directors, at least quarterly.

In order to manage our assets and liabilities and achieve the desired
liquidity, credit quality, interest rate risk, profitability and capital targets, we have sought to:

acquire
longer-term borrowings at fixed rates, when appropriate, to offset the negative impact of longer-term fixed rate loans in our
loan portfolio, and

·

limit the percentage of long-term fixed-rate loans in our portfolio.

Depending on the level of general interest rates, the relationship
between long and short-term interest rates, market conditions and competitive factors, the Asset and Liability Management Committee
may increase our interest rate risk position somewhat in order to maintain our net interest margin and improve earnings. We will
continue to increase our emphasis on the origination of relatively short-term and/or adjustable rate loans. In addition, in an
effort to avoid an increase in the percentage of long-term, fixed-rate loans in our portfolio, during the first quarter of 2017
we sold in the secondary market $21.3 million of primarily fixed rate, one- to four-family mortgage loans with a term to maturity
of 15 years or greater.

35

If past rate movements are an indication of future changes, they
usually are neither instantaneous nor do a majority of core deposits reprice at the same level as rates change. The following chart
reflects the Bank’s percentage change in net interest income, over a one year time period, and net portfolio value (NPV)
assuming an instantaneous parallel rate shock in a range from down 100 basis points to up 400 basis points as of March 31, 2017.

Percentage Change in

Net Interest Income

NPV

Rate Shock:

Up 400 basis points

(11.1

)%

(22.6

)%

Up 300 basis points

(7.7

)%

(16.4

)%

Up 200 basis points

(4.6

)%

(10.2

)%

Up 100 basis points

(2.0

)%

(5.0

)%

Down 100 basis points

(4.6

)%

(7.1

)%

The following chart indicates the Company’s percentage change
in net interest income and NPV assuming rate movements that are not instantaneous, but change gradually over one year.

Percentage Change in

Net Interest Income

NPV

Rate Shock:

Up 400 basis points

(3.5

)%

(19.5

)%

Up 300 basis points

(3.3

)%

(14.9

)%

Up 200 basis points

(2.8

)%

(9.6

)%

Up 100 basis points

(1.6

)%

(4.9

)%

Down 100 basis points

(4.6

)%

(7.1

)%

As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the chart. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if interest rates
change, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed
in calculating the tables. Therefore, the Company also considers potential interest rate shocks that are not immediate parallel
shocks in various rate scenarios. Management currently believes that interest rate risk is managed appropriately in more practical
rate shock scenarios than those in the chart above.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and (as defined in sec
Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) that is designed to provide reasonable
assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed,
summarized and reported accurately and within the time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as
appropriate. An evaluation of the Company’s disclosure controls and procedures as of March 31, 2017, was carried out under
the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of
our senior management preceding the filing date of this annual report. Our Chief Executive Officer and Chief Financial Officer
concluded that, as of March 31, 2017, the Company’s disclosure controls and procedures were effective in ensuring that the
information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated
and communicated to the Company’s management (including our Chief Executive Officer and Chief Financial Officer) in a timely
manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

The Company does not expect that its disclosure controls and procedures
will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control
procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, withinMutualFirst have been detected. These inherent limitations include the realities that judgment in decision-making can be faulty,
and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure
also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

36

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting
(as defined in SEC Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2017, that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART
II.

OTHER
INFORMATION

Item
1.

Legal
Proceedings

None.

Item
1A.

Risk
Factors

There are no material changes to the risk factors disclosed in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Item
2.

Unregistered
Sales of Equity Securities and Use of Proceeds

On February 19, 2016, the Company announced that its Board of Directors
had authorized the repurchase of up to 375,000 shares of common stock, or approximately 5% of its then-outstanding shares over
a one-year period. As of March 31, 2017, the Company had repurchased 175,428 shares at a weighted average price of $24.82 per share
for a total of $4.4 million, and there were 199,572 remaining shares that may be repurchased under the current authorization. There
were no shares repurchased during the three months ended March 31, 2017. These stock repurchases may be made from time-to-time
in open market or negotiated transactions as deemed appropriate by the Company and will depend on market conditions.

Item
3.

Defaults
Upon Senior Securities.

None.

Item
4.

Mine
Safety Disclosures.

Not applicable.

Item
5.

Other
Information.

None.

37

Item 6. Exhibits.

RegulationS-KExhibitNumber

Document

Referenceto PriorFiling orExhibitNumberAttachedHereto

3.1

Articles of Incorporation

b

3.1a

Articles Supplementary to Charter

p

3.2

Articles Supplementary for the Series A Preferred Stock

c

3.3

Articles Supplementary for the SBLF Preferred Stock

a

3.4

Amended Bylaws

k

3.4a

Amended and Restated Bylaws

q

3.5

Articles Supplementary to the Company’s Charter re: term of appointed directors

l

4.1

Form of Common Stock Certificate

b

4.2

Form of Certificate for the Series A Preferred Stock

c

4.3

Form of Certificate for the SBLF Preferred Stock

a

9

Voting Trust Agreement

None

10.1

Employment Agreement with David W. Heeter

e

10.2

Employment Agreement with Patrick C. Botts

e

10.3

Form of Supplemental Retirement Plan Income Agreements for Patrick C. Botts and David W. Heeter

f

10.4

Named Executive Officer Salaries and Bonus Arrangements for 2013

n

10.5

Form of Director Shareholder Benefit Program Agreement, as amended, for Jerry D. McVicker

g

10.6

Form of Agreements for Executive Deferred Compensation Plan for Patrick C. Botts and David W. Heeter

f

10.7

Registrant’s 2001 Stock Option and Incentive Plan

h

10.8

Registrant’s 2001 Recognition and Retention Plan

h

10.9

Director Fee Arrangements for 2016

d

10.10

Director Deferred Compensation Plan

i

10.11

MutualFirst Financial, Inc. 2008 Stock Option and Incentive Plan

d

10.12

MFB Corp. 2002 Stock Option Plan

d

10.13

MFB Corp. 1997 Stock Option Plan

d

10.14

Employment Agreement with Charles J. Viater

e

10.15

Salary Continuation Agreement with Charles J. Viater

e

10.16

Loan Agreement with First Tennessee Bank National Association dated December 21, 2009.

m

10.17

Form of Incentive Stock Option Agreement for 2008 Stock Option and Incentive Plan

j

10.18

Form of Non-Qualified Stock Option Agreement for 2008 Stock Option and Incentive Plan

j

10.19

Small Business Lending Fund - Securities Purchase Agreement, dated August 25, 2011, betweenMutualFirst Financial, Inc. and the Secretary of the Treasury, with respect to the issuance and sale of the SBLF Preferred Stock

a

10.20

Repurchase Agreement dated August 25, 2012, betweenMutualFirst Financial, Inc. and the United States Department of the Treasury, with respect to the repurchase and redemption of the TARP Preferred Stock

a

10.21

Employment Agreement with Christopher D. Cook.

e

10.22

Agreement with Richard J. Lashley and PL Capital Group

q

11

Statement re computation of per share earnings

None

12

Statements re computation of ratios

None

14

Code of Ethics

o

16

Letter re change in certifying accountant

None

18

Letter re change in accounting principles

None

21

Subsidiaries of the registrant

d

38

22

Published report regarding matters submitted to vote of security holders

None

23

Consents of experts and counsel

d

24

Power of Attorney

None

31.1

Rule 13(a)-14(a) Certification (Chief Executive Officer)

31.1

31.2

Rule 13(a)-14(a) Certification (Chief Financial Officer)

31.2

32

Section 1350 Certification

32

101

Financial Statements from the Company’s Form 10-Q for the three months ended March 31, 2017 and 2016 and year ended December 31, 2016, formatted in Extensive Business Reporting Language (XBRL); (i) Consolidated Condensed Balance Sheets as of March 31, 2017 and December 31, 2016; (ii) Consolidated Condensed Statements of Income for the Three months ended March 31, 2017 and 2016; (iii) Consolidated Condensed Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016; (iv) Consolidated Condensed Statement of Stockholders’ Equity for the Period Ended March 31, 2017; (v) Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016; and (vi) Notes to Consolidated Financial Statements for the Three Months Ended March 31, 2017 and 2016, as follows:

101.INS

XBRL Instance Document

101.INS

101.SCH

XBRL Taxonomy Extension Schema Document

101.SCH

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.CAL

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.DEF

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document

101.LAB

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.PRE

a

Filed as an exhibit to the Company’s Form 8-K filed on August 26, 2011 and incorporated herein by reference.

b

Filed as an exhibit to the Company’s Form S-1 registration statement filed on September 16, 1999 and incorporated herein by reference.

c

Filed as an exhibit to the Company’s Form 8-K filed on December 23, 2008 and incorporated herein by reference.

d

Filed as an Exhibit to the Company’s Annual Report on Form 10-K filed on March 23, 2009 and incorporated herein by reference.

e

Filed as an exhibit to the Company’s Form 10-Q filed on November 9, 2016 and incorporated herein by reference.

f

Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on March 16, 2017 and incorporated herein by reference.

g

Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on March 16, 2017 and incorporated herein by reference.

h

Filed as an Appendix to the Company’s Form S-4/A Registration Statement filed on October 19, 2001 and incorporated herein by reference.

i

Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on March 16, 2017 and incorporated herein by reference.

j

Filed as an exhibit to the Company’s Form 10-K filed on March 23, 2010 and incorporated herein by reference.

k

Filed as an exhibit to the Company’s Form 8-K filed on October 15, 2007 and incorporated herein by reference.

l

Filed as an exhibit to the Company’s Form 8-K filed on July 15, 2008 and incorporated herein by reference.

m

Filed as an exhibit to the Company’s Form 8-K filed on December 24, 2009 and incorporated herein by reference.

n

Filed as an exhibit to the Company’s Form 8-K filed on February 15, 2012 and incorporated herein by reference.

o

Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on March 15, 2004 and incorporated herein by reference.

p

Filed as an exhibit to the Company’s Form 8-K filed on July 15, 2008 and incorporated herein by reference.

q

Filed as an exhibit to the Company’s Form 8-K filed on February 27, 2015 and incorporated herein by reference.

(b) Exhibits - See list in (a)(3)
and the Exhibit Index following the signature page.

(c) Financial Statements Schedules -
None

39

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 10, 2017

By:

/s/David W. Heeter

David W. Heeter

President and Chief Executive Officer

Date: May 10, 2017

By:

/s/Christopher D. Cook

Christopher D. Cook

Senior Vice President, Treasurer and Chief Financial Officer

40

INDEX TO EXHIBITS

Number

Description

31.1

Rule 13(a)-14(a) Certification (Chief Executive Officer)

31.2

Rule 13(a)-14(a) Certification (Chief Financial Officer)

32

Section 1350 Certification

101

Financial Statements from the Company’s Form 10-Q for the three months ended March 31, 2017 and 2016 and year ended December 31, 2016, formatted in Extensive Business Reporting Language (XBRL); (i) Consolidated Condensed Balance Sheets as of March 31, 2017 and December 31, 2016; (ii) Consolidated Condensed Statements of Income for the Three Months Ended March 31, 2017 and 2016; (iii) Consolidated Condensed Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016; (iv) Consolidated Condensed Statement of Stockholders’ Equity for the Period Ended March 31, 2017; (v) Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016; and (vi) Notes to Consolidated Financial Statements for the Three Months Ended March 31, 2017 and 2016, as follows:

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